Business activity across the Russian service sector showed modest and slower expansion in June 2018, the report by IHS Markit shows.

In June the manufacturing sector PMI showed contraction for the second month in a row, calling into question the speed and strength of the Russian economic recovery. Previously exceptionally strong growth in the services sector consistently helped to push the composite (manufacturing plus services) output up despite persistent volatility on the manufacturing side.

Russia Services Business Activity Index declined to 52.3 in June, down from 54.1 in May, while still staying above the 50.0 no-change mark indicating expansion, albeit below the long-term series average. 

“Despite the World Cup kicking off, business activity in Russia’s service sector expanded at only a modest rate in June," Markit Economist Sian Jones commented, adding that "a softer rise in output was accompanied by the weakest increase in new business since mid-2016."

As a consequence, the Russia Composite Output Index (covering both manufacturing and services) posted 52.0 in June, down from 53.4 in May. “June survey data indicated the softest overall private sector expansion since May 2016," Jones notes.

The pace of output expansion in services was the weakest in just over two years, according to Markit. "Where a rise in new business was reported, panellists linked this to the acquisition of new clients; however, some firms noted that market conditions were uncertain," the report notes. 

Same as in manufacturing, average cost burdens faced by service providers increased in June, with the rate of input price inflation accelerating and remaining elevated. Anecdotal evidence commonly linked the rise in prices to supplier shortages and higher raw material costs, especially the much-discussed fuel price rise. 

Service providers could not pass the input inflation to the customers, with average charges increasing only modestly in June, linked by panellists to difficult demand conditions restricting the pass-through effect. 

Still, same as in manufacturing, the degree of optimism across the Russian service sector increased in June. Confidence was widely attributed to hopes of further growth in output and new business, and the recent acquisition of new clients.